Novelty Acts: Western Hedge Funds in China

As I write, I am listening to the debut album of Col. Bruce Hampton (Ret.) and the Aquarium Rescue Unit. Pop completists will know about this novelty act, whose musical chops did not get in the way of stage antics like having some guy mini-putt golf throughout the show. Antics aside, this is a well-drilled band, and live numbers such as "Yield Not to Temptation," "Working on a Building," and "Basically Frightened" are oddly apt for today's post. Sample lyrics: I'm basically frightened / Of politicians with no hobbies.

For, in modern-day China, we also find novelty acts. There, they're called "Western hedge funds" [ooh, exotic!] Given the control freak nature of the PRC leadership--nowhere else in the world will you see a government so gung-ho to prop up its stock markets for a military parade--it's odd that these folks would be allowed to operate at all when they will use nearly every tactic to eke out gain even if market stability suffers. China's leaders don't like volatility, nossir--especially at the hands of Western financialist-evildoers.

But, like the Aquarium Rescue Unit, the remarkable thing is that Western hedge funds do exist in China--albeit in a hush-hush, uneasy situation. Enter the QDLP scheme:

Almost two years after the Shanghai launch of the Qualified Domestic
Limited Partnership – a pilot programme that gives foreign hedge funds
access to China – the rules are unclear to many in the industry. Effie Vasilopoulos, a partner at the Hong Kong office of law firm Sidley Austin,
said Chinese regulators never officially invited hedge fund managers to
participate, and did not release the rules that applied to the QDLP
programme or the names of participants.

Who are these guys...and what do they do in China, exactly? You will have to dig deep to find out:

The names of participants did not surface until they had filed
applications for feeder hedge funds that raise assets in China for
investment into offshore hedge funds, and they were only found by those
who knew where to look. Oaktree
Capital filed such an application for a feeder hedge fund at the end of
July, becoming the fifth one to emerge with a fund. It was one of six
that had been hand-picked by Chinese regulators to participate in the
first round of QDLP. Canyon Partners, Citadel, Man Group and Och-Ziff Management all launched their products earlier in 2015, leaving only Winton Capital with no fund under the QDLP.

Many question why you should even bother setting up shop in China when there are few potential investors in hedge funds...

Kurt Ersoy,
the chief executive of Segantii Capital Management, which is based in
Hong Kong and manages one of Asia’s largest hedge funds, the Segantii
Asia Pacific Equity Multi-Strategy fund, said he had not considered QDLP
for asset raising. “Looking at the headlines, it seems to be the case
that assets are harder to raise than expected,” he added.

Vasilopoulos said: “It is not a product that the market is familiar
with. It took perhaps longer than the government expected for the market
to get to know these products, to embrace them.” Hedge fund managers themselves have been reluctant to discuss their
progress under the QDLP, and still less has been heard from the
authorities in Shenzhen and Qingdao.

...and, this being control freak China, there is a whole lot you can't do whether tacitly or explicitly stated:

But some typical hedge fund tactics might not go down well. Chinese
hedge funds, locally known as “sunshine funds”, face restrictions on
short selling, margin financing, how they can trade futures and
commodities and how they can use derivatives to hedge their exposure. Vasilopoulos said this was still a “major problem” for hedge funds,
but added that the arrival of sophisticated foreign hedge funds could
prompt Chinese regulators to revise their rules on financial
instruments.

The thought of hedge fund managers being sent to prison or, heaven forbid, re-education camps is what comes to mind. After all, what worse enemies of the people can you think of than running dogs of capitalism threatening to undermine China's self-styled harmonious society? If you like financial adventurism, though, there is much to recommend a career being a hedge fund manager in China.